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Effects of Reputation in Bubbles and Crashes ( Revised in April 2008 )

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  • Hitoshi Matsushima

    (Faculty of Economics, University of Tokyo)

Abstract

We analyze the stock market by modeling it as a timing game among arbitrageurs for beating the gun. We assume that (1) arbitrageurs are behavioral with a small probability, (2) the bubble soft-lands, and (3) the postcrash price increases as the X-day is postponed. Due to these assumptions, the effect of reputation assumes importance because any rational arbitrageur is willing to build a reputation in order to ride the bubble. It is demonstrated that the bubble persists for a long period as an outcome of a unique symmetric Nash equilibrium, even if all arbitrageurs are almost certainly rational.

Suggested Citation

  • Hitoshi Matsushima, 2008. "Effects of Reputation in Bubbles and Crashes ( Revised in April 2008 )," CARF F-Series CARF-F-121, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf121
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    File URL: https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/125.pdf
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    References listed on IDEAS

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